Opinion
No. 00-82350, Adv. No. 01-8024
March 5, 2002
OPINION
Gary T. Rafool, the Chapter 7 Trustee ("TRUSTEE"), brought this action under § 545 of the Bankruptcy Code, 11 U.S.C. § 545, to avoid a statutory lien claimed by Methodist Medical Center of Illinois ("METHODIST") under the Illinois Hospital Lien Act ("ACT"), 770 ILCS § 35/1, et seq. The matter is before the Court on cross motions for summary judgment.
BACKGROUND
The facts are not disputed. Prior to filing bankruptcy, one of the Debtors, Brandyn L. Cagle ("DEBTOR"), was injured and received treatment from METHODIST. The TRUSTEE settled the personal injury claim and brought this adversary proceeding against several of the DEBTOR'S medical service providers to determine the validity of their claimed liens.
METHODIST, conceding that its notice of lien contains an incorrect date for the date of the DEBTOR'S injury, contends that it substantially complies with the statutory requirements, so that its lien is perfected and unavoidable.
This Court decided the same legal issue raised in this case in Barber v. Trinity Medical Center, Adv. No. 00-8020, (Bankr.C.D.Ill. July 6, 2001) (Unpublished), holding that a trustee cannot avoid a statutory hospital lien, perfected under state law, under § 545(2), which gives the TRUSTEE only the rights accorded a bona fide purchaser ("BFP") of the property, because a cause of action for personal injuries is not assignable under Illinois law. The TRUSTEE appealed that decision and on December 14, 2001, the district court affirmed this Court's decision, ruling that the technical deficiency in the notice of lien did not cause the lien to be invalid, following the Illinois Supreme Court's decision in Cirrincione v. Johnson, 184 Ill.2d 109, 703 N.E.2d 67, 234 Ill.Dec. 455 (1998). The defect in the notice of lien in the present case is indistinguishable from the defect in the notice in Barber v. Trinity.
On January 14, 2002, the TRUSTEE filed a Notice of Appeal of the district court's judgment to the Seventh Circuit Court of Appeals.
In his motion, the TRUSTEE requests that the Court reconsider Barber v. Trinity, for several reasons not raised in that case. He argues that the qualifying clause in Section 545(2), "whether or not such a purchaser exists," should be interpreted to permit the Court to ignore the non-assignability of personal injury claims under Illinois law. Next, the TRUSTEE contends that because the non-assignability of personal injury claims is a common law doctrine based on public policy concerns not present here, the Court is not bound to apply the doctrine in this case. The TRUSTEE also raises Section 544 as an alternative basis for avoidance. Finally, he relies upon Section 362(a)(4).
Section 545(2) provides that a bankruptcy trustee may "avoid the fixing of a statutory lien on property of the debtor to the extent that such lien. . . (2) is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser that purchases such property at the time of the commencement of the case, whether or not such a purchaser exists."
ANALYSIS A. Hypothetical BFP'S powers are limited by state law.
The natural reading of the final clause of Section 545(2) is that the BFP may be hypothetical, and need not be actual. This interpretation is firmly supported by a substantial body of case law interpreting similar clauses in Section 544. The trustee's "strong-arm" avoiding powers in Section 544(a)(1) and (2), where the trustee is accorded the rights of a judicial lien creditor and a creditor with an unsatisfied execution against the debtor, respectively, are accorded "whether or not such a creditor exists." Similarly, the rights of a BFP of real property under Section 544(a)(3), are accorded "whether or not such a purchaser exists." It is well established that these clauses simply mean that the trustee does not have to identify an actual creditor or purchaser who asserted or could have asserted such powers.
Rather, the trustee may assert those powers as if, hypothetically, the trustee himself was such a creditor or purchaser in existence at the petition date. In re Thomason, 202 B.R. 768, 770 (Bankr.D.Colo. 1996); In re Beaudoin, 160 B.R. 25, 31 (Bankr.N.D.N.Y. 1993).
By comparison, Section 544(b)(1) does not contain such a clause, and the trustee's avoiding power accorded there is dependent upon the existence of an actual creditor holding an allowable unsecured claim who could have avoided the transfer in question under state law. In re Cybergenics Corp., 226 F.3d 237, 243 (3rd Cir. 2000); In re Image Worldwide, Ltd., 139 F.3d 574, 576-77 (7th Cir. 1998). The meaning of the last clause of Section 545(2) is properly interpreted consistent with the similar phrases in Section 544 to mean that the trustee does not have to identify an actual purchaser.
Even so, the TRUSTEE accords a broader implication to the hypothetical status of the BFP under Section 545(2). Not only may a BFP be hypothesized, even where one doesn't actually exist, says the TRUSTEE, but the BFP'S powers may also be hypothesized to extend beyond those actually granted by law. Upon careful examination of the statute, it is readily apparent that this reasoning is flawed.
Unlike Section 544(a)(3), where the trustee is actually given the status of a BFP, making the test one of BFP vs. lienholder with the inquiry limited to the steps taken by the lienholder, in Section 545(2), the trustee is given the power to avoid a statutory lien where the lien would not be enforceable against a hypothetical BFP. In re Walter, 45 F.3d 1023, 1029 (6th Cir. 1995).
Section 544(a) expressly grants the trustee "the rights and powers of" certain creditors and a BFP of real property. Section 545(2) contains no such language.
Stating the test in that manner, the proper inquiry is both broader and more particularized, becoming whether the statutory lien in question which exists on the debtor's property is enforceable against a BFP of that property on the date the bankruptcy was filed. Id. It is the first step in making that determination, whether a "purchaser" may acquire an interest in that property, which this Court finds to be dispositive.
Non-assignability is the exception and not the rule. The only causes of action that are not assignable in Illinois are torts for personal injuries and actions for other wrongs of a personal nature, such as those that involve the reputation or feelings of the injured party. Kleinwort Benson North America, Inc. v. Quantum Financial Services, Inc., 181 Ill.2d 214, 692 N.E.2d 269, 229 Ill.Dec. 495 (1998).
This point becomes clearer when less abstract. The application of Section 545(2) in this case begins by posing the following query: If an independent third party (i.e., not the TRUSTEE) purchased from the DEBTOR, on the petition date, the pending claim for personal injury damages, would METHODIST'S perfected statutory lien be enforceable against the purchaser? Under Illinois law, the answer is yes, it would be enforceable. Why? Because Illinois law holds that such a purchase is void. Therefore the purchaser would have acquired no interest in the DEBTOR'S claim whatsoever, much less an interest free and clear of METHODIST'S statutory lien.
This analysis is not a novel one. In In re Smith, 263 B.R. 71 (Bankr.D.N.J. 2001), the court employed such an approach in determining whether the trustee could avoid an attorney's lien in the settlement proceeds of the debtor's personal injury action. First noting that the trustee cannot avoid a statutory lien on property that could not have been lawfully conveyed at the time the bankruptcy was filed, the court continued:
Applicable state law determines whether the subject property can be conveyed lawfully, and thus, whether a lien is enforceable against a bona fide purchaser. See In re Sullivan, 254 B.R. 661, 668 (Bankr.D.N.J. 2000) (citing In re Loretto Winery, 898 F.2d at 720).
The property at issue in this case is [the debtor's] claim against Allstate. Pursuant to Bankruptcy Code § 541, that claim is property of [the debtor's] bankruptcy estate. . . . Applicable New Jersey law, however, prohibits the assignment, and therefore the sale, of personal injury tort claims prior to judgment. Thus, if the lawsuit was proceeding against the adverse driver, the trustee would not be able to avoid the [law] firm's lien because a personal injury tort claim cannot be sold in New Jersey, and there could be no hypothetical bona fide purchaser of such claim for purposes of Bankruptcy Code § 545(2).
(Citations omitted).
263 B.R. at 77-78. Because the debtor's claim had been settled against the adverse driver before the bankruptcy filing, the claim pending was under the debtor's own insurance policy pursuant to the underinsured motorist provision. That claim for indemnification was assignable under New Jersey law and the court turned to the next step, the issue of perfection of the lien.
The TRUSTEE'S proposed interpretation of Section 545(2) is also faulty because it ignores the dependency upon state law that the BFP standard invokes where a lien arising under a state statute is concerned. Whether a lien arising under a state statute is enforceable against a BFP is governed by the law of that state. In re Petroleum Piping Contractors, Inc., 211 B.R. 290 (Bankr.N.D.Ind. 1997). Rather than, as the TRUSTEE suggests, permitting the Court to ignore Illinois law, the hypothetical BFP standard of Section 545(2) requires the Court to look to Illinois law to determine the enforceability of a statutory hospital lien against a hypothetical BFP. Since a purchaser may not, under Illinois law, "avoid" a perfected hospital lien by purchasing the personal injury claim, neither may the TRUSTEE under Section 545(2).
Cf., In re Harvey, 222 B.R. 888 (9th Cir.BAP 1998) (state law determines whether trustee's status as BFP will defeat rights of persons against whom trustee seeks to assert his or her strong-arm powers under Section 544(a)).
Second, the TRUSTEE argues that because the non-assignability of personal injury claims is a common law doctrine based on public policy concerns not present here, the Court is not bound to apply the doctrine in this case. Relying upon language drawing a distinction between a voluntary assignment and an assignment by operation of law in Judge Larry Lessen's decision in In re Haynes, Case No. 93-72106 (Bankr.C.D.Ill. March 2, 1999) (Unpublished), holding that a non-assignable legal malpractice action is property of the bankruptcy estate, the TRUSTEE suggests that it is only the restriction against voluntary assignments which applies in the bankruptcy context and, presumably, that the exercise of the TRUSTEE'S avoidance powers here would be in the nature of an assignment by operation of law. As in Haynes, the DEBTOR'S personal injury action, even though non-assignable, is nevertheless property of the bankruptcy estate. Judge Lessen did not address the issue in the context of a trustee's lien avoidance action, and nothing in that case lends support to the TRUSTEE'S position. In any event, the definition of a BFP excludes the possibility of an involuntary transfer.
Section 101(43) of the Bankruptcy Code defines "purchaser" to mean a "transferee of a voluntary transfer, and includes immediate or mediate transferee of such a transferee." 11 U.S.C. § 101(43). Under Illinois law as well, there cannot be a BFP without a voluntary transfer. Daniels v. Anderson, 162 Ill.2d 47, 642 N.E.2d 128, 204 Ill.Dec. 666 (1994).
It must be presumed that Congress chose the BFP standard precisely so that state public policy would play a role in determining which statutory liens could be avoided by a trustee. By permitting state statutory liens to remain effective in bankruptcy, and by basing the trustee's avoiding power in Section 545(2) upon the rights of a BFP as defined by state law, rather than a uniform federal standard, Congress has deferred to local policy that varies from state to state. See, In re Loretto Winery Ltd., 898 F.2d 715, 718-19 (9th Cir. 1990). Although the TRUSTEE would prefer a broader, uniform avoiding power, where state statutory liens are at issue, Congress has chosen to forego uniformity in deference to state public policy.
This Court must apply the standard enacted by Congress, impotent though it may be for the TRUSTEE in this particular circumstance. Any potential distinction based upon an involuntary transfer is simply not available to the TRUSTEE under the BFP standard enacted in Section 545(2).
B. Section 545 is the exclusive mechanism for statutory lien avoidance.
Though the TRUSTEE'S complaint is filed under § 545, in his motion for summary judgment he also contends that the lien is avoidable under § 544 of the Bankruptcy Code, 11 U.S.C. § 544. In response, METHODIST contends that the TRUSTEE should be required to amend his complaint in order that it may have an opportunity to properly answer the allegations. Despite that position taken by METHODIST, this Court concludes that METHODIST'S statutory lien could not, as a matter of law, be avoided by the TRUSTEE pursuant to the general strong-arm provision of § 544. In so ruling, this Court adopts the reasoning of the court in In re Sullivan, 254 B.R. 661 (Bankr.D.N.J. 2000). Holding that § 545 is the exclusive provision for avoiding statutory liens, the court in Sullivan found support both in the legislative history to § 545 and the rules of statutory construction, stating:
The TRUSTEE raised this issue on appeal to the district court in Barber v. Trinity, but the court declined to consider the issue because it was not raised before this Court.
The Code's legislative history supports this finding specifically stating that § 545(b) "limits the trustee's power to avoid tax liens under Federal, state, or local law." S.Rep. No. 95-989, at 27 (1978). From this language, it is clear that Congress' intent was to provide a set of specific conditions in 11 U.S.C. § 545 by which statutory liens could be avoided by a trustee in bankruptcy (footnote omitted). . . .
Congress specifically provided the conditions under which statutory liens on a debtor's property could be avoided by the trustee in bankruptcy; Congress could have allowed a trustee to avoid all unrecorded liens or all unrecorded state tax liens, but did not do so. . . . In sum, the plain language of the Bankruptcy Code provides that statutory liens not avoidable under any condition specified in section 545 have secured status, and there is nothing in the Code that suggests state tax liens should not continue to be regarded as statutory liens if they meet the conditions of section 545.
[In re Stanford, 825 F.2d 353, 355-57 (5th Cir. 1987)]. Congress specified those conditions it deemed essential to an unavoidable valid statutory lien, and, by omission, declined to require other preconditions. See id. at 357. Matter of Faita, 164 B.R. 6 (Bankr.D.Conn. 1994), relied upon by the TRUSTEE, is inapposite as well. In that case, the statute expressly provided that the insurer's lien did not "attach" until the insured actually received the proceeds from the There is an ancient canon of statutory construction: expressio unius est exclusio alterius. The method prescribed in a statute for enforcing the rights provided in it is presumed to be exclusive. Furthermore, as a general rule, a more specific statute covering a particular subject is controlling over a provision covering the same subject in more general terms-that is, that the inclusion of one thing is the exclusion of the other. Where there is no clear intention otherwise, a specific statute will not be controlled or nullified by a general one, regardless of the priority of enactment.
In passing § 545, Congress provided a comprehensive scheme for avoidance of certain statutory liens. To this extent, § 545 precludes the application of any other provision in the Bankruptcy Code, and therefore the trustee may not employ § 544. . . . (Citations omitted).
254 B.R. at 666-67. This Court holds that Section 545 is the exclusive mechanism for avoiding a valid statutory lien so that the TRUSTEE may not rely upon his strong-arm powers to attack METHODIST'S lien.
C. Statutory lien avoidance is determined as of the petition date.
Asserting another theory not alleged in his complaint, the TRUSTEE relies upon Section 362(a)(4) which provides that the petition operates as a stay of "any act to create, perfect, or enforce any lien against property of the estate." 11 U.S.C. § 362(a)(4). Because the lawsuit had not been settled at the time the bankruptcy petition was filed, the TRUSTEE contends that METHODIST'S lien had neither come into existence nor "attached" and that Section 362(a)(4) prevents its lien from attaching postpetition. Not only does the TRUSTEE recovery. There was no question in that case that the insurer's lien was not perfected prior to the filing of the bankruptcy, and the court concentrated upon Sections 362(b)(3) and 546(b), which, in tandem, contain an exception to the automatic stay for acts to perfect a lien postpetition where applicable state law permits perfection to relate back. misapply his avoiding powers under Section 545(2), his interpretation of the ACT is contrary to both a reading of the statute in its entirety and established case law construing its effect.
The TRUSTEE relies on In re Estate of Cooper, 125 Ill.2d 363, 532 N.E.2d 236, 126 Ill.Dec. 551 (1988). In Cooper, the Supreme Court of Illinois upheld the immediate enforcement of a hospital lien against a structured settlement annuity, reversing the lower courts' reasoning that the lien could not be enforced until the future payments were actually received by the injured party. Although the court stated that the lien could only come into existence when a recovery was made and that the lien was only "created when there is property on hand to which it may attach," the court's only concerns, as it noted, were with the enforcement of the lien. Declining to permit the lien act to be circumvented by the structured settlement, the court emphasized the important purpose of the medical service provider lien acts in promoting health care for the poor and benefitting the well-being of the community. Under the TRUSTEE'S interpretation, statutory hospital liens would effectively be meaningless in bankruptcy whenever a trustee administers a personal injury claim, since the lien would never come into existence until the claim is liquidated by settlement, judgment or verdict. This Court cannot accept Cooper as support for that result.
Under Section 545(2), the trustee is authorized to avoid, not "a statutory lien," but "the fixing of a statutory lien" on a debtor's interest in property that is not perfected or enforceable against a BFP that purchases such property at the time of the commencement of the case.
Matter of Merchants Grain, Inc. By and Through Mahern, 93 F.3d 1347, 1356 (7th Cir. 1996). "Fixing" refers to a temporal event and necessitates asking "when" the lien fixed. Id. The plain language of Section 1 of the ACT, provides that the lien arises when the hospital renders services and is created upon "all claims and causes of action." 770 ILCS 35/1. The lien against the claim or cause of action is perfected when the notice of lien is served. In re Estate of Phillips, 163 Ill. App.3d 935, 517 N.E.2d 30, 115 Ill.Dec. 65 (2d Dist. 1987); Illini Hosp. v. Bates, 135 Ill. App.3d 732, 482 N.E.2d 235, 90 Ill.Dec. 528 (3d Dist. 1985). After the notice has been given, the lien is "fixed" upon the claim or cause of action even though no recovery has yet been had. Section 2 of the ACT, which addresses attachment of the lien, provides that after the required notice has been given, the lien "attach[es] to any verdict or judgment secured in any action . . . and to any money or property which may be recovered by compromise settlement . . . ." Once the lien is perfected, it attaches automatically to any damages recovered.
If, as of the petition date, the hospital had not given notice, or the form of notice was so defective as to not substantially comply with the statutory requirement, per Cirrincione v. Johnson, then the lien would not have "fixed" on the claim and the TRUSTEE would not need to invoke the Section 545(2) avoiding power. Rather, an unperfected lien claim could be dispatched in an adversary proceeding to determine the lien's validity.
The attachment of the lien to the proceeds pursuant to Section 2 in no way derogates the fixing of the lien on the unliquidated claim pursuant to Section 1. Were it otherwise, Section 1 would be rendered nugatory.
But the TRUSTEE'S right to avoid METHODIST'S lien is not determined at the time he entered into a compromise settlement. By twice using the phrase "at the time of the commencement of the case," Section 545(2) makes it clear that this determination is made as of the petition date. When the petition was filed, METHODIST claimed a lien on the DEBTOR'S cause of action for personal injuries. METHODIST had served notice of its lien, and as held by the district court in Barber v. Trinity, controlling here, the technical defect in the notice did not render the lien invalid or unperfected. METHODIST'S claim is not dependent upon a postpetition act and Section 362(a)(4) is of no assistance to the TRUSTEE.
In the comparable context of Section 544(a), where the identical phrase is used, the trustee's rights and powers as a hypothetical BFP must be evaluated as of the date the bankruptcy case was commenced. In re Marlar, 252 B.R. 743 (8th Cir.BAP 2000); In re Stewart, 256 B.R. 259 (Bankr.S.D.Ohio 2000).
The provision requiring the injured person to notify the hospital of a judgment, award, settlement or compromise of the claim or cause of action and permitting the hospital to perfect its lien within thirty days of receiving such notice, added to Section 1 by P.A. 89-404, was later held unconstitutional in its entirety by the Supreme Court of Illinois in People v. Reedy, 186 Ill.2d 1, 708 N.E.2d 1114, 237 Ill.Dec. 74 (1999). That provision would have enabled a hospital, such as METHODIST here, to perfect its lien postpetition, and further evinces the legislature's strong favor of liens granted to medical service providers.
CONCLUSION
Faced with a perfected statutory lien that "fixed" upon the pending claim prior to the petition date, and constrained by a purchaser's inability to acquire an interest in a personal injury claim under Illinois law, the TRUSTEE is unable to avoid METHODIST'S statutory lien under Section 545(2), the only section available to him for that purpose. Accordingly, METHODIST'S motion for summary judgment shall be granted and the TRUSTEE'S cross motion shall be denied.
This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered.
ORDER
For the reasons stated in an OPINION filed this day, IT IS HEREBY ORDERED that the Motion for Summary Judgment filed by the TRUSTEE is DENIED and the Motion for Summary Judgment filed by METHODIST is GRANTED and Judgment is hereby entered in favor of METHODIST and against the TRUSTEE.